The Lemon Fool

The only IT tracker is merging

http://www.londonstockexchange.com/exch ... 50704.html

It's always been the odd man out, often at a discount and it was hard to see why a tracker that was an investment trust was better than other ways of holding a tracker investment.

Annoying for anyone now landed with a CGT liability.

My guess is that they could not compete on costs with the large open-endeds. Or to put it another way, they could not find a fund management firm willing to take this on for the money on offer!

Provided that you accept the new shares rather than cash, there should not be a CGT liability.

GeoffF100 wrote:Provided that you accept the new shares rather than cash, there should not be a CGT liability.

A form of blackmail then. Either take shares in something quite differently invested to what you already have in order to avoid CGT, or take cash below NAV. This is a despicable way for the board to behave and not in shareholders best interests. I would be hopping mad if I held this fund as I would not want either of the proposed options. I don't see why some kind of deal could not have been thrashed out to offer a replacement OEIC tracker. Then investors could have wound down in their own good time if that is what they chose to do.

If there is a lesson to be learned here, perhaps it is that there is a risk in going too off piste with investments. If all you want is a tracker, buy a conventional large ETF from one of the established firms (Vanguard, iShares, etc.) or an OEIC from a similar large established fund manager.

hiriskpaul wrote:

GeoffF100 wrote:I don't see why some kind of deal could not have been thrashed out to offer a replacement OEIC tracker. Then investors could have wound down in their own good time if that is what they chose to do.

Actually that probably would have been useless as well. Some overseas investors and/or brokers may not have been able to offer an OEIC.

Best solution would have been to say that the fund will be wound up in 5 years time. No further share buybacks would be carried out in the period, but all income after expenses would be paid out. That would have enabled holders to take action to mitigate CGT in a more timely manner. The fixed end date would have reduced any discount to NAV. In addition the fund manager could have been sacked and replaced by a firm better equipped to handle a tracker, such as Vanguard, Blackrock, Fidelity, HSBC, L&G, etc. and at lower cost.

As I understand it, investment trusts are companies, and take overs and mergers are treated in the same way as for other companies. There is always a risk that your IT will be taken over for cash (i.e. a forced sale) or shares in another incompatible IT. With a bog standard OEIC or ETF tracker, any take over is likely to be like for like, except possibly for the costs. If it is an exotic tracker, who knows. A bog standard market weighted tracker from Vanguard is likely to continue as such and not be taken over. If you are outside a tax shelter, it is wise to be conservative.

The is also the nasty issue of platform fees. Halifax/iWeb is free of them, but that could change, and the alternatives do not look inviting. Perhaps it is safest to stick to ETFs outside a tax shelter.

That quote was not from me. If someone managed to buy a big holding at the market bottom and has large capital gains, they can take the shares option, and sell some of the new trust each year within their CGT allowance. They may be holding a trust that they did not choose for a while, but that is life. I am not an expert, but I expect that if the IT had been replaced with an OEIC, that would have been a disposal for CGT purposes, rather than a company merger. Could the IT have been merged with an ETF? I am not sure about that.

GeoffF100 wrote:As I understand it, investment trusts are companies, and take overs and mergers are treated in the same way as for other companies. There is always a risk that your IT will be taken over for cash (i.e. a forced sale) or shares in another incompatible IT.

Ironically, over on TMF Luniversal would tout one of the advantages of ITs as being their longevity. But in fact these kinds of corporate actions are not unusual and I have had a few ITs wound up over the years. Nor is size a guarantee - in fact it is often the larger ITs on big discounts that look attractive to corporate raiders and deal-obsessed executives. In fact the biggest IT of the 1980's - Globe - met this fate.

The massive penetration of ETFs into the market probably means less demand for ITs and launches of new ITs are still rare.

I don't think that there is any doubt that a number of very old IT's have some very easy attractions for investors. These are funds with continuous histories over 100-150 years. They have survived world wars, crashes, depressions, flu pandemics, the falls of empire (while still in at least one case keeping the name) and yet they are still here, still making real returns for their investors and in most cases doing so without fuss. No open ended fund anywhere can come close to that.

Of course not every IT is like that. And of course not every IT survives. But compared to other fund types they survive a lot better on average. In this case much as I like IT's (that are the majority of my holdings), I would struggle to see the advantage of an IT passive tracker in the age of ETF's.

Lots of investments can last a long time before they disappear. That does make them good investments. Ever heard of Barings Bank? Lasted over 200 years then went bust overnight. A similar fate may await the worlds oldest surviving bank Banca Monte dei Paschi di Siena (founded over 500 years ago) if a bailout by bondholders cannot be agreed.

A lot of closed ended funds come and go. Many are designed up front to do that, either as limited life or indefinite but subject to infrequent shareholder continuation votes. The scandal here is that the board have unilaterally decided to pull the plug with very little warning and a short wind up period, the motivation of which appears to me to be about increasing fund management charges. The board should have announced a wind up date 5 years from now then handed management over to someone used to handling trackers, such as Blackrock, if Aberdeen were unwilling to continue with it. The whole point of the board is to act in the interests of shareholders rather than the fund manager. This would not be the first time that did not happen.